1. What distinguishes a spot market from a derivatives market? What distinguishes the money market from the capital market? How does the efficiency of a market affect an investor's strategy?
2. The following is an excerpt taken from a January 11, 2008, speech entitled "Monetary Policy Flexibility, Risk Management, and Financialisruptions" by Federal Reserve Governor Frederic S. Mishkin (www. federalreserve.gov/newsevents/speech/mishkin20080111a.htm):
Although financial markets and institutions deal with large volumes of information, some of this information is by nature asymmetric. ... Historically, banks and other financial intermediaries have played a major role in reducing the asymmetry of information, partly because these firms tend to have long-term relationships with their clients. The continuity of this information flow is crucial to the process of price discovery. ... During periods of financial distress, however, information flows may be disrupted and price discovery may be impaired. As a result, such episodes tend to generate greater uncerta
Answer the following questions pertaining to the statement:
a. What is meant by asymmetric "information by nature"?
b. What is the problem caused by information asymmetry in financial markets?
c. How do you think banks have historically "played a major role in reducing the asymmetry of information"?
d. What is meant by "price discovery"?
e. Why is the continuity of information flow critical to the process of price discovery?